Chapter 16: Profiting from National Fortune

“It’s not really about trapping retail investors,” Old Jia said, savoring the sour tang of the pickled radish as he smacked his lips and continued, “Investors need to be educated about risk, and the best way to teach them is by letting them lose money. If making money were too easy, no matter what you say about risk, they’d just turn a blind eye. The market is the best teacher.”

“But our money is hard-earned too. You just watch us lose it and act as if it’s only natural?” Long Wuyang said irritably. Old Jia glanced at him, thinking this kid’s fund must have taken a hit this week. New investors who lose money always get restless like this.

“You securities folks are always like this—so sanctimonious,” Director Wang complained. “Why didn’t you say all this back in late September? Now that others are trapped, you start spouting these fancy words.” Director Wang was a slightly overweight, balding guy with years of grassroots government experience, known for his sharp and straightforward observations.

“Kids make mistakes; parents spanking them is only right. A spanking won’t kill anyone,” Old Jia soothed everyone. “Don’t worry, the market isn’t over yet. It will rise again—have faith in that.”

“Really? When will it go up?” Long Wuyang asked eagerly.

“It’s not that easy. After a long rise, a fall is inevitable! If it keeps consolidating like this, it will erode all market confidence,” Ding the Big Investor said with a deliberately schadenfreude tone. “And when they try to lift the index again, they’ll have to spill a ton of money.”

“Ha! Don’t scare the new investors!” Old Jia shot back at Ding, then confidently addressed the group: “Relax, it’s not that bleak. This round of selling by state-owned institutions is mainly to cool down the market. After they finish unloading, they will eventually re-enter. China’s fiscal model has shifted from relying on land finance to equity finance. In the future, equity will be the most important asset on the national balance sheet, and the key asset held by local state-owned institutions. Stocks of listed companies are like the old land resources—first, they stockpile shares, then inject quality assets and teams through mergers and acquisitions. The teams are like developers; the quality assets are like premium school district properties. With such a business model, how could state capital ever give up? So, they will definitely buy back on dips. But I believe there needs to be at least a 300 to 500 point gap from their selling to re-entry to make this feasible. Next up is a long, drawn-out bottoming process. It’s all about buying low and selling high—institutions excel at these swing trades.”

“Buy low, sell high?” Ding said. “Only institutions can time that well. Retail investors always end up as the chaff getting cut during those swings.”

“Well, there’s no helping that,” Old Jia put down his chopsticks and wiped his mouth. “That’s why retail investors shouldn’t trade stocks directly. It’s better to buy a fund.”

“You’re going to recommend your CSI 500 fund again, aren’t you?” Long Wuyang said with a mix of doubt and fear. “Index funds are fully invested all the time; their wild swings are scary and intense.”

“Index funds always have smaller fluctuations than individual stocks. If you’re going to be the chaff, you better have a strong heart. For new investors, buying funds is a more suitable approach and the best way to learn the capital market,” Old Jia replied.

“Now the holdings and investment amounts in index funds have surpassed active funds. I think this is a sign that China’s stock market is maturing,” President Lu exhaled a smoke ring slowly and said, “If this wave of retail investors is mainly using index funds to invest in the stock market, it shows that this post-2000 generation of retail investors is pretty smart. They’ve found an investment method that suits them.” Then he blew out a puff of smoke, which made Long Wuyang cough violently.

“That’s right. Buying index funds means you’re earning the country’s fortune, earning beta. Admitting your limitations in investing ability and giving up chasing alpha to pursue the era’s dividends—that’s the maturity of China’s stock market,” Ding the Big Investor, a seasoned trader, said, leaving Long Wuyang stunned.

Director Wang chimed in: “Actually, think about it. The reason our generation can still manage to keep a decent appearance isn’t really about our own abilities. We just happened to stand at the crest of the times. Our success is because we earned the money of our fiery era—that’s basically earning beta.”

Everyone highly agreed with Director Wang’s summary.

“For beta, let’s have a drink!” Old Jia proposed.

“To beta!” everyone stood up in unison. Long Wuyang imitated the group of old men, taking a big gulp of soda. Sitting back down, he muttered to himself, “Do we post-2000 chaff even have beta?”

Everyone was momentarily stunned, then burst into laughter.